If you’ve ever looked at your paycheck and felt shocked by how much smaller your take-home pay is than your gross salary, you’re not alone. Every American worker sees a significant chunk of their earnings disappear before it hits their bank account and most of it goes to taxes and withholdings.
In this guide, we’ll break down which taxes and withholdings take the biggest bite out of your paycheck, why they’re deducted, and how they’re calculated. Understanding these deductions helps you plan better financially and even explore strategies to reduce them legally.
Gross Pay vs. Net Pay
Before diving into the details of withholdings, it’s essential to understand the difference between gross pay and net pay:
- Gross Pay is your total earnings before any deductions.
- Net Pay (also called take-home pay) is what remains after all deductions and withholdings.
The difference between these two figures is often surprising, and the main culprits are federal, state, and local taxes, plus other mandatory and optional deductions.
Major Types of Taxes Deducted from Your Paycheck
1. Federal Income Tax
Biggest Bite: ✅ Yes
Mandatory: ✅ Yes
Variable: ✅ Based on income and filing status
The federal income tax is the largest tax withheld from most paychecks. The amount you pay depends on your income level, marital status, and the number of allowances you claim on your W-4 form.
The IRS uses a progressive tax system, which means the more you earn, the higher your tax bracket. For 2024, federal income tax brackets range from 10% to 37%.
Here’s a simplified example:
| Tax Bracket | Income Range (Single Filers) | Tax Rate |
|---|---|---|
| 10% | Up to $11,600 | 10% |
| 12% | $11,601 to $47,150 | 12% |
| 22% | $47,151 to $100,525 | 22% |
| 24% | $100,526 to $191,950 | 24% |
| … | … | … |
Why it takes a big bite:
Most workers fall into the 12%–24% range, which quickly adds up, especially if you’re earning over $50,000 annually.
2. FICA Taxes (Social Security and Medicare)
Biggest Bite: ✅ Yes
Mandatory: ✅ Yes
Flat Rate: ✅ For most
FICA stands for the Federal Insurance Contributions Act, and it funds Social Security and Medicare:
- Social Security tax: 6.2% of gross wages up to the wage base limit ($168,600 for 2024)
- Medicare tax: 1.45% on all wages (with an extra 0.9% for high earners above $200,000)
Total FICA: 7.65% of your paycheck (employers match this, but you still pay your half)
Example:
If you earn $60,000 annually, you’ll pay:
- $3,720 in Social Security
- $870 in Medicare
Total: $4,590/year in FICA taxes
3. State Income Tax
Biggest Bite: ✅ Depends on your state
Mandatory: ✅ (in most states)
Variable: ✅ Based on income and state
Not all states tax income, but most do. Here’s a quick look:
- No income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming
- Flat-rate tax: Colorado (4.4%), Utah (4.65%)
- Progressive tax states: California (up to 13.3%), New York (up to 10.9%), Oregon, and others
Why it matters:
If you live in a high-tax state like California or New York, your paycheck takes a much bigger hit.
Example:
A California resident making $80,000 could pay around $4,000–$6,000 annually in state income tax, depending on deductions.
4. Local Taxes
Biggest Bite: ❌ Usually smaller
Mandatory: ✅ In some cities/counties
Variable: ✅ Based on location
Certain cities and counties impose local income taxes, typically ranging from 1% to 3%.
- New York City: Up to 3.876%
- Philadelphia: 3.79%
- Detroit: 2.4%
Why it matters:
Local taxes often surprise people who relocate. Even a small percentage adds up over time.
Other Withholdings That Reduce Your Take Home Pay
Taxes aren’t the only reason your paycheck is smaller than expected. Here are non-tax withholdings that can significantly reduce your net pay:
5. Health Insurance Premiums
Many employers offer health, dental, and vision insurance, and the employee portion is deducted pre-tax.
How much?
It varies by employer and coverage level, but typical premiums can be:
- Single coverage: $100–$200/month
- Family coverage: $400–$1,000/month
Why it feels like a big bite:
Even though it’s pre-tax, it still lowers your gross pay and take-home amount. Plus, premiums often increase yearly.
6. Retirement Contributions (401(k), 403(b))
If you participate in an employer-sponsored retirement plan, those contributions are deducted from your paycheck usually pre-tax for traditional plans.
How much?
- Default rates: 3%–6%
- Max limit (2024): $23,000 (or $30,500 if over 50)
Why it can be a significant reduction:
The more you contribute, the smaller your take-home pay. But the upside is long-term savings and tax deferral.
7. Wage Garnishments
Biggest Bite: ✅ For those affected
Mandatory: ✅ If ordered
Variable: ✅ Based on type of debt
If you owe child support, back taxes, or have a court-ordered debt, a portion of your paycheck may be garnished.
Examples:
- Child support: Up to 50% of disposable income
- Student loans: Up to 15%
- Tax debt: IRS can garnish without court order
8. Union Dues and Other Fees
Some jobs, especially in trades or public sectors, require union membership. Union dues can be a flat fee or a percentage of your pay.
Why it matters:
These fees aren’t taxes, but they’re mandatory if you’re part of a unionized workplace, further reducing your net income.
How to Check What’s Being Withheld
Your pay stub or online payroll portal provides a breakdown of all deductions, including:
- Federal income tax
- State income tax
- FICA (Social Security & Medicare)
- Health insurance
- Retirement contributions
- Other deductions (garnishments, union dues)
Tip: Review it regularly to ensure there are no errors or unexpected deductions.
Can You Reduce These Deductions?
While some withholdings are non-negotiable, there are a few strategies to maximize your take-home pay:
1. Update Your W-4 Form
Adjust your withholdings if you’re overpaying taxes throughout the year. The IRS W-4 form allows you to fine-tune this.
2. Use Pre-Tax Benefits
Take advantage of:
- Flexible Spending Accounts (FSAs)
- Health Savings Accounts (HSAs)
- Commuter benefits
These lower your taxable income.
3. Maximize Employer Contributions
Ensure you’re getting full matching contributions on 401(k) plans. It’s free money and doesn’t reduce your net pay.
4. Move to a Low-Tax State
It’s not for everyone, but relocating to a state with no income tax can save you thousands annually.
Example Paycheck Breakdown
Let’s say you earn $75,000/year and live in New York:
| Deduction | Amount (Estimated) |
|---|---|
| Federal Income Tax | $8,000 |
| FICA (7.65%) | $5,737 |
| NY State Income Tax | $3,000 |
| NYC Local Tax | $2,000 |
| Health Insurance | $2,400 |
| 401(k) Contribution (5%) | $3,750 |
| Total Deductions | $24,887 |
Take-home pay: ~$50,113
That’s over 33% of your salary gone before it hits your bank!
Final Thoughts
Taxes and withholdings are an unavoidable part of working in the U.S., but understanding where your money is going can empower you to make better financial decisions.
The biggest bites typically come from:
- Federal income tax
- FICA taxes (Social Security & Medicare)
- State and local taxes (if applicable)
Other deductions like health insurance and retirement contributions also add up, though they serve long-term benefits.
Pro Tip:
Use a paycheck calculator (like ADP, PaycheckCity, or SmartAsset) to estimate your deductions and net pay based on your specific situation.
Key Takeaways
- The largest deductions from your paycheck are usually federal income tax, FICA, and state/local income taxes.
- Health insurance premiums and retirement contributions also impact your take-home pay.
- You can’t avoid most of these, but you can optimize your withholdings and benefits to keep more money in your pocket.
- Always review your pay stub and consider speaking with a tax advisor if you’re unsure about your withholdings.